MIDDLE TEST PLAN OF DEVELOPMENT

This is a work of fiction. Names, characters, businesses, places, events and incidents are either the
products of the authors imagination or used in a fictitious manner. Any resemblance to actual persons,
living or dead, or actual events is purely coincidental.
 Middle Test Plan of Development

Instructions

1. Please write a maximum of four-pages proposal (excluding appendix) in response to the case
study. I will be strict with the number of allowed pages. The proposal could be in English or
Indonesia. This Middle Test is Personal and not a group. If there is similarity among some
students, so the Middle Test will be 0.
2. Please submit your proposal in a PDF(I will not check another format) document with:
a. Calibri, 11 pt
b. Normal margin (top, left, bottom, right 1)
c. Multiple spacing at 1.15pt
3. Please submit your proposal via email to: andywilliem93@gmail.com before May 5, 2017
11.59 AM.

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IPA Business Case Competition 2017
 Middle Test Plan of Development

Attracting Foreign Investment in Kingdom Calbias Oil and Gas Sector

Middle Test Plan of Development
Fueled by backlash from citizens and the ongoing investigation stemming from a corruption scandal,
King Samarot removed Minister Williams from his post as the Minister of Energy. Under Minister
Williamss leadership, the energy sector also experienced significant declines in oil and gas investment.
In addition, global investors deemed upstream oil and gas bid round awards uninteresting, and
questions regarding the countrys energy security were raised continually in industry reviews.

The King has appointed you as the new Energy Minister, hoping to see improvement in the energy
sectorparticularly upstream oil and gas due to their contribution to the Kingdoms economy and for
the countrys own energy security.

Country overview
Located in South Asia, Kingdom Calbia is bordered by the Arabian Sea and the Indian Ocean, and several
Middle Eastern countries. Geographically, it is a favorable location for ports and shipping with access
from Africa and the Middle East. Garantz Port, a major port in Kingdom Calbia, plays an important role
in Liquid Natural Gas (LNG) shipping.

The population of Kingdom Calbia is 41.7 million (2016), growing at a rate of 1.5% per year. The capital
city is Odissiy, famous for the beautiful Azira Palace. Odissiy has a population of 6.2 million. The King
is the head of the state and government and holds full executive power. The current King, King
Samarot, has Ministers to counsel him on various matters and govern the day-to-day operations of the
state. Ministers are chosen directly by the King and his Advisory Council.

Aside from the King and the Ministers, Kingdom Calbia recognizes a Parliament. The Parliament is a
legislative body comprising representatives from various regions. It may propose a bill after the
approval of the Cabinet; however, the final decision and passing of the law still resides within the Kings
authority. The Royal family enjoys venerated status within the country, and it is not uncommon to see
members of the royal family appointed Speaker of the Parliament or to key Cabinet positions. Critics
have cited nepotism and corruption as obstacles to good governance under previous Energy Ministry.

Charges of nepotism and corruption are further supported by the states relatively low score of 40 in
the 2013 Corruption Perception Index (0 to 100 score range with 0 associated to be highly corrupt).
In an attempt to improve the countrys governance, the King introduced a national anti-corruption
commission in 2011, a year after his inauguration. An entirely independent authority, the commission
reports directly to King Samarot. The response from various industries and international NGOs has
been positive. The commission also has wide support from citizens, especially after the charge of the
former Minister of Energy accepted bribes for the gas refinery tender in the southern part of Kingdom
Calbia. The corruption case is still ongoing, and the surrounding publicity has led to a decline in public
perception of the oil and gas sector, which is now seen as teeming with corruption.

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 Middle Test Plan of Development

Economy
Kingdom Calbia has experienced stable economic growth for the past seven years. In the early 2000s,
huge economic growth was driven by an oil and gas field startup. This growth was slowing down due
to an oil price slump in the late 2000s driven by an oil price slump (see Appendix 2) as well as the fact
that there has been no significant additional oil and gas investment since the early 2000s due to the
introduction of PRRT which is deemed burdening by investors. Detailed Economic data is included in
the Appendix 3.

Reduced number of winners on offered blocks

25
2012
9

20
2013
7
17 -19%
2014
4

Copyright 2013 by The Boston Consulting Group, Inc. All rights reserved.
13
2015
2

11
2016
1

0 10 20 30

Reduced winners YoY on offered blocks

Total blocks offered Total winners

Oil & Gas in Kingdom Calbia

History
Kingdom Calbia has 40.2 tcf1 of proven natural gas reserve and 14,200 MMBO2 of proven oil reserve.
It has produced oil and gas since the 1950s, mainly from existing onshore oil and gas fields. Prospective
new exploration areas are in shallow water3 and in well-developed areas with ample infrastructure
and connectivity.

Until 1995, Kingdom Calbia restricted foreign oil and gas company operations within the Kingdom,
leaving those operations to Xenergy, the countrys National Oil Company (NOC). However, a significant
production decline in the 1980s and 1990s was largely caused by the NOCs inability to manage its
assets optimally, and by slow technological development. The country amended its energy policy in
1995, opening its doors to other local and international oil companies to operate within Kingdom

1
Trillion cubic feet
2
Million barrels of oil equivalent
3
Shallow water discoveries will lead to cheaper cost for development.

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 Middle Test Plan of Development

Calbia. The industry responded positively, and the first bid rounds4 after the reform were deemed
successful by various energy watchers. (Refer to Appendix 4 for Oil and Gas production and demand)

Governance
The upstream oil and gas industry in Kingdom Calbia is regulated by the Ministry of Energy. The
Ministry sets and issues energy policy and law, but day-to-day operations and supervision are
conducted by Xenergy. The royalty rate, bidding rounds, and working areas are all governed by the
Ministry, while Xenergy oversees production and exploration progress, work commitments and
activities5, and field development.

This model has been challenged several times due to a conflict of interest in Xenergys role as oversight
body and oil and gas producer. The most recent case was a border dispute. Foreign oil company Arrow
made an oil discovery in one of its offshore working areas that shares a border with an exploration
block operated by Xenergy. Months later, Xenergy announced that it had found oil in its nearby
exploration block. Discussions took place on whether the two oil discoveries belonged to the same
reservoir. Unitization6 was planned with Xenergy as the moderating body but, despite Arrows block
being bigger, the operatorship and larger participating interest7 was given to Xenergy. Despite major
protests from Arrow, the Ministry of Energy approved Xenergys proposal. The case is still being
disputed in court, with the government remaining in favor of Xenergys proposal.

Industry players have always identified bureaucratic challenges as the main challenge in oil and gas
investment in Kingdom Calbia. Despite adopting a royalty system for its fiscal regime, investors must
also obtain layers of permits before they can operate in Kingdom Calbia. Kingdom Calbia currently has
177 permits related to its oil and gas operations, and some examples are shown below of related
ministries and the numbers of permits they own.

Ministry/ Ministry of Ministry of Ministry of Ministry of

Agency energy environment transport trade
# of permits 27 39 13 9

Oil & Gas

Environmental permit Import permit
operating permit Cabotage (for LNG
Examples tanker or other Explosive Import
nc. All rights reserved.

Seismic survey Land use permit transport ships)

permit permit (for drilling or
surveys)

4
A bidding round is where the government offers/tenders blocks (working areas) to companies. The companies
can then submit their bids which the government will assess based on its criteria. The blocks can then be
awarded.
5
Work commitment is the minimum amount of work a company must do upon signing a contract with the state.
6 Unitization is the unified development from multiple oil and gas blocks to develop an entire reservoir or

prospect. Commercial arrangements are usually done to structure the operatorship.

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 Middle Test Plan of Development

7
Participating interest is a share or proportion of a project that an entity owns.

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 Middle Test Plan of Development

Fiscal regime
Petroleum Resource Rent Tax (PRRT)

Following the 1998 global financial crisis that hampered oil and gas prices worldwide, Kingdom Calbia
introduced a new tax regulation, Petroleum Resource Rent Tax (PRRT), effective from 1 June 2002. The
objective of the PRRT was to increase state revenues to fund current development projects.

PRRT is a profit-based tax levied at a rate of 35% of a projects taxable profit.8 It is applied to a project
at its own facilities, and to those outside the area that are necessary for the production and initial
storage of petroleum commodities (crude oil, natural gas, LPG, etc.). PRRT is calculated as assessable
receipts minus eligible expenditures. Eligible expenditures are defined as all project development and
operating expenditures, including closing-down expenses. Assessable receipts must be higher than
eligible expenditures in the given year for the PRRT to be calculated; otherwise the unused expenditure
amounts are carried forward and compounded annually at a set rate.9 As a general formula, receipts
are first deducted from the general expenditure (including carry-forward amount if there is any),
followed by exploration expenditure (including carry-forward amount if there is any), the last
deduction is the closing-down expenditure. (Refer to Appendix 5 for an example of PRRT calculation).
PRRT payments are deductible for company income tax purposes.

Royalties

In 1990, the King amended the regulations governing NOCs to loosen the permits required and
restrictions on the energy industry and attract many foreign investors. One of the changes was to move
from the Petroleum Sharing Contract (PSC) to a royalty-based approach, as it is deemed more
straightforward. Royalty rates for oil and gas products are set out below.

o Oil products
The royalty rate is based on global oil price. If the oil price is below US$50 per barrel, the rate
is fixed at 10%. If the oil price is above US$50 per barrel, the rate will be increased according
to the following formula:
Rate = [(0.15 x contractual oil price) + 2.5]%
Example:
If the oil price is US$50 per barrel, the royalty rate is 10% [(0.15 x US$50)%+2.5%].
If the oil price is US$51 per barrel, the royalty rate is 10.15% [(0.15 x US$51)%+2.5%].

o Gas products
The royalty rate for gas products is the contractual price per MMBTU divided by 100.
Example:
If the contractual price is US$5 per MMBTU, the royalty rate is 5%.

8
Taxable profit is the project's income after project and exploration expenditures, including a compounded
amount for carried forward expenditures, have been deducted from all assessable receipts.
9
The long-term bond in Kingdom Calbia is 10%. The exploration expenditure compounding rate is 15% above
the long-term bond, and for general expenditure it is 5% above the long-term bond.

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 Middle Test Plan of Development

Corporate Income Tax (CIT) for the oil and gas industry

Back in 1990, having benchmarked against other countries, the King decided to set the CIT be set at
15%. This made Kingdom Calbia a haven for IOCs with the lowest CIT in the region. As with PRRT
implementation, Kingdom Calbia decided to increase the CIT in order to fund current development
projects and decrease the state deficit. CIT was set at 15% from 1990 to 2006, increased to 25% in
2007, and increased again to 30% from 2012 until now. As expected, investors were disappointed by
the change in the tax rate as it increased their burden and put many projects on hold because of the
lack of favorable returns. Furthermore, the continually declining number of winners on development
blocks shows a lack of interests by IOCs in investing in Kingdom Calbias oil and gas sector.

Corporate tax rate

% (applies to both oil and gas products)
50

40

30
30

013 by The Boston Consulting Group, Inc. All rights reserved.

25

20
15

10
10

0
Old 1990 - 2006 2007 - 2012 2012 - now

Having been appointed as the new Energy Minister, the King has high hopes on you to revive the
industry and attract oil & gas investments from abroad, as well as revitalizing the relationship between
the upstream oil & gas industry and the government. How would you as the countrys new Energy
Minister increase the attractiveness of Kingdom Calbias upstream oil and gas industry to global
investors?

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IPA Business Case Competition 2017